Trump vs. the Economy


 

Trump vs. the Economy

December 30, 2018  by

https://www.project-syndicate.org/commentary/trump-behavior-causes-stock-market-drop-by-nouriel-roubini-2018-12

Between publicly chastising US Federal Reserve Chair Jerome Powell and escalating his trade war with China, US President Donald Trump has finally rattled the markets. While investors were happy to look the other way during the first half of Trump’s term, the dangerous spectacle unfolding in the White House can no longer be ignored.

NEW YORK – Financial markets have finally awoken to the fact that Donald Trump is US president. Given that the world has endured two years of reckless tweets and public statements by the world’s most powerful man, the obvious question is, What took so long?

For one thing, until now, investors had bought into the argument that Trump is all bark and no bite. They were willing to give him the benefit of the doubt as long as he pursued tax cuts, deregulation, and other policies beneficial to the corporate sector and shareholders. And many trusted that, at the end of the day, the “adults in the room” would restrain Trump and ensure that the administration’s policies didn’t jump the guardrails of orthodoxy.

These assumptions were more or less vindicated during Trump’s first year in office, when economic growth and an expected increase in corporate profits – owing to forthcoming tax cuts and deregulation – resulted in strong stock-market performance. In 2017, US stock indices rose more than 20%.

But things changed radically in 2018, and especially in the last few months. Despite corporate earnings growing by over 20% (thanks to the tax cuts), US equity markets moved sideways for most of the year, and have now taken a sharp turn south. At this point, broad indices are in correction territory (meaning a 10% drop from the recent peak), and indices of tech stocks, such as the Nasdaq, are in bear-market territory (a drop of 20% or more).

Though financial markets’ higher volatility reflects concerns about China, Italy and other eurozone economies, and key emerging economies, most of the recent turmoil is due to Trump. The year started with the enactment of a reckless tax cut that pushed up long-term interest rates and created a sugar high in an economy already close to full employment. As early as February, growing concerns about inflation rising above the US Federal Reserve’s 2% target led to the year’s first risk-off.

Then came Trump’s trade wars with China and other key US trade partners. Market worries about the administration’s protectionist policies have waxed and waned throughout the year, but they are now reaching a new peak. The latest US actions against China seem to augur a broader trade, economic, and geopolitical cold war.

An additional worry is that Trump’s other policies will have stagflationary effects (reduced growth alongside higher inflation). After all, Trump is planning to limit inward foreign direct investment, and has already implemented broad restrictions on immigration, which will reduce labor-supply growth at a time when workforce aging and skills mismatches are already a growing problem.

Moreover, the administration has yet to propose an infrastructure plan to spur private-sector productivity or hasten the transition to a green economy. And on Twitter and elsewhere, Trump has continued to bash corporations for their hiring, production, investment, and pricing practices, singling out tech firms just when they are already facing a wider backlash and increased competition from their Chinese counterparts.

Emerging markets have also been shaken by US policies. Fiscal stimulus and monetary-policy tightening have pushed up short- and long-term interest rates and strengthened the US dollar. As a result, emerging economies have experienced capital flight and rising dollar-denominated debt. Those that rely heavily on exports have suffered the effects of lower commodity prices, and all that trade even indirectly with China have felt the effects of the trade war.

Even Trump’s oil policies have created volatility. After the resumption of US sanctions against Iran pushed up oil prices, the administration’s efforts to carve out exemptions and bully Saudi Arabia into increasing its own production led to a sharp price drop. Though US consumers benefit from lower oil prices, US energy firms’ stock prices do not. Besides, excessive oil-price volatility is bad for producers and consumers alike, because it hinders sensible investment and consumption decisions.

Making matters worse, it is now clear that the benefits of last year’s tax cuts have accrued almost entirely to the corporate sector, rather than to households in the form of higher real (inflation-adjusted) wages. That means household consumption could soon slow down, further undercutting the economy.

More than anything else, though, the sharp fall in US and global equities during the last quarter is a response to Trump’s own utterances and actions. Even worse than the heightened risk of a full-scale trade war with China (despite the recent “” agreed with Chinese President Xi Jinping) are Trump’s public attacks on the Fed, which began as early as the spring of 2018, when the US economy was growing at more than 4%.

Given these earlier attacks, markets were spooked this month when the Fed correctly decided to hike interest rates while also signaling a more gradual pace of rate increases in 2019. Most likely, the Fed’s relative hawkishness is a reaction to Trump’s threats against it. In the face of hostile presidential tweets, Fed Chair Jerome Powell needed to signal that the central bank remains politically independent.

But then came Trump’s decision to shut down large segments of the federal government over Congress’s refusal to fund his useless Mexican border wall. That sent markets into a near-panic, and the government shutdown was soon followed by reports that Trump wants to fire Powell – a move that could turn a correction into a crash. Just before the Christmas holiday, US Treasury secretary Steven Mnuchin was forced to issue a public statement to placate the markets. He announced that Trump was not planning to fire Powell after all, and that US banks’ finances are sound, effectively highlighting the question of whether they really are.

Recent changes within the administration that do not necessarily affect economic policy making are also rattling the markets. The impending departure of White House Chief of Staff John Kelly and Secretary of Defense James Mattis will leave the room devoid of adults. The coterie of economic nationalists and foreign-policy hawks who remain will cater to Trump’s every whim.

As matters stand, the risk of a full-scale geopolitical conflagration with China cannot be ruled out. A new cold war would effectively lead to de-globalization, disrupting supply chains everywhere, but particularly in the tech sector, as the recent ZTE and Huawei cases signal. At the same time, Trump seems to be hell-bent on undermining the cohesion of the European Union and NATO at a time when Europe is economically and politically fragile. And Special Counsel Robert Mueller’s investigation into Trump’s 2016 election campaign’s ties to Russia hangs like a Sword of Damocles over his presidency.

Trump is now the Dr. Strangelove of financial markets. Like the paranoid madman in Stanley Kubrick’s classic film, he is flirting with mutually assured economic destruction. Now that markets see the danger, the risk of a financial crisis and global recession has grown.

Nouriel Roubini, a professor at NYU’s Stern School of Business and CEO of Roubini Macro Associates, was Senior Economist for International Affairs in the White House’s Council of Economic Advisers during the Clinton Administration. He has worked for the International Monetary Fund, the US Federal Reserve, and the World Bank.

 

 

Harapan entering a grey area, a year before 2020


December 26, 2018

Harapan entering a grey area, a year before 2020

 

 

Opinion  |  by Phar Kim Beng

COMMENT | As I write this, Malaysia, as governed by Pakatan Harapan, is entering both a festive occasion – marked by Christmas and the New Year – and a festering one too. There are five telltale signs of the latter:

  • The tragic death of firefighter Muhammad Adib Mohd Kassim in the Seafield temple riots.
  • The 55,000 who gathered in Kuala Lumpur for the rally against the International Convention on the Elimination of All Forms of Racial Discrimination (Icerd).
  • Authorities seemingly forgetting about M Indira Gandhi’s missing daughter, and about Teoh Beng Hock’s death nearly ten years ago.
  • Close to 15 percent of Malaysia’ population will be above 60 years of age by 2023.
  • About 38,000 Felda settlers getting cost of living aid  and deposits for replanting.

In any one of the above, Harapan has at best either been silent, or belatedly proactive. Meanwhile, the world continues to change in five ways:

  • US President Donald Trump deciding on two simultaneous withdrawals from Syria and Afghanistan, signalling the end of American presence in two of the most conflict-prone regions in the world.
  • Russia staying quiet on the pullout of American troops, although this strategic withdrawal is akin to the collapse of the Berlin Wall.
  • Islamic State and the Taliban also staying quiet, suggesting a deeper motivation to push deeper into the Western world, or perhaps Asia, to wreak more havoc;
  • China’s One Belt, One Road initiative, which appeared to be all but irreversible, has been challenged by the Quad (United States, Japan, Australia and India).
  • Japan, one of the key powers in the Indo-Pacific region, continuing to shrink in terms of population, thus further heightening its insecurity.

These are dangerous times. There are some quaint parallels: the elan of the Vietnam War, when Communist forces pushed forward from the north to south in 1975; the fall of Kabul in 1989; the Russian incursion in Georgia in 2008; and the slow but organic militarisation of South China Sea from 2011 onwards when China, for the first time, referred to the area as its “core interest,” a term previously only reserved for Taiwan and Tibet.

But there is no telling if Harapan is aware of the whiplash effects of these world events. Political scientist Arthur Stein once warned of the importance of “relative gains” in international relations, wherein all great powers see gains and losses in zero-sum terms.

Granted, Malaysia has a foreign and defence policy that seems to be geared towards the centrality of ASEAN. But there is no telling if it wants to adjust to a post-US-Japanese world and the emerging Sino-Russian world order.

East Asia is entering this post-US-Japanese world. The US had always made it a point to keep Tokyo informed of any dramatic moves.

But now, at the speed of a tweet, Trump proceeded to announce the withdrawal of the US from the theater of the Middle East and South Asia, without notifying its staunchest East Asian allies Japan and South Korea.

Japan got its first taste of the ‘Nixon shock’ when the then-US president announced his plan to visit China in 1971, before Nixon announced his New Economic Programme, which included abandoning the gold standard.

The country would be shocked again when it received no thanks from Sabah Al-Ahmad Al-Jaber Al-Sabah of Kuwait for its financial contribution to Operation Desert Storm led by then-president George Bush.

What Trump did in recent weeks must constitute a third shock for Japan – a major ally pulling out of two regions at the same time, even with the opposition of outgoing Secretary of Defense James Mattis.

By pulling out of Syria and Afghanistan, Japan must be reeling from the fear that its security relationship with Washington can be subject to the same forces that catapulted Trump to power – populism and the American far right.

China and Russia must also be smiling in glee, with the American admission of the impossibility of conducting simultaneous conflicts in two regions.

Malaysia is entering a world of uncertain geopolitical realities and flux.

What adds to the instability is the fact that it is ruled by a new coalition of four parties now beset by infighting – and one still due for a possibly messy transition at the top.

Prime Minister Dr Mahathir Mohamad still looks set to hands over the reins to Anwar Ibrahim, although there are signs that things are less than rosy behind the scenes – such as when the daughter of the latter quit her posts in government.

The new year seems likely to put Malaysia in a pinch as it looks ahead to 2020.


PHAR KIM BENG is a multiple award-winning head teaching fellow on China and the Cultural Revolution at Harvard University.

The views expressed here are those of the author/contributor and do not necessarily represent the views of Malaysiakini.

 

 


December 25, 2018

Apocalypse Trump

by

https://www.project-syndicate.org/commentary/trump-syria-withdrawal-mattis-shutdown-by-elizabeth-drew-2018-12

With no compromise in sight to end the federal government shutdown, and no one left in President Donald Trump’s cabinet who can restrain him, Americans and their allies are staring into the abyss that has been looming since the 2016 election.

 

WASHINGTON, DC – For those who hadn’t yet figured it out, the price of having a US president who disdains expert opinion and who is impulsive, mendacious, not very smart, disturbed, uninformed, incurious, incompetent, intemperate, corrupt, and a poor negotiator became irrefutably clear in recent days. Three large developments from last Wednesday through Saturday unnerved even some of Donald Trump’s Republican protectors, who had rationalized that, after all, he had cut taxes (mainly on the rich and corporations) and put two conservatives on the Supreme Court bench. But the dangers of having such a person in the Oval Office were now becoming harder to ignore.

All three big events were alarming, and on a bipartisan basis: each was damaging to US national interests, and each was avoidable. Worse, because they came in rapid succession, they created the sense that now (as opposed to previous alarms) the Trump presidency was truly spinning out of control.

On the morning of Wednesday, December 19, Trump tweeted that ISIS had been defeated and that the US would, therefore, withdraw its troops from Syria. The decision came as a bolt from the blue for all but a small number of government officials – every one of whom had tried to dissuade him. Key members of Congress hadn’t been informed, much less consulted; nor had America’s allies, some of whose troops have been dependent on the presence of the US military. Major foreign policy decisions simply aren’t made that way: allies are consulted beforehand; relevant congressional figures are at least informed before any such announcement. Such precautions are about more than good manners: an administration might learn something as it consults and informs.

The decision was immediately and widely denounced. Trump’s usual Senate ally, Lindsey Graham, said, “ISIS has been dealt a severe blow but are not defeated. If there has been a decision to withdraw our forces in Syria, the likelihood of their return goes up dramatically.” The withdrawal, to begin immediately, abandons the Kurds, whom the US had been protecting from Turkey, and preempted a planned joint attack on ISIS. The withdrawal leaves Syria to the mercies of Bashar al-Assad, Russia (Assad’s patron), and Iran.

The only foreign leaders who welcomed the decision were Turkey’s authoritarian leader, Recep Tayyip Erdoğan, and Russian President Vladimir Putin. It later emerged that Erdoğan had persuaded Trump, who had said earlier, as a general proposition, that he wanted to withdraw US troops from Syria, to do so). Then came the news that Trump had also decided – again with scant consultation – to withdraw half the US troops in Afghanistan, despite the US being in the midst of negotiations with the Taliban.

The announcement of the sudden withdrawal from Syria was too much for defense secretary James Mattis, the most respected member of Trump’s cabinet – though it was far from the only provocation. On Thursday, Mattis, widely seen as the only hope for reining in Trump’s most dangerous impulses, stunned almost everyone by resigning. His eloquent resignation letter made clear that he objected not just to the Syrian blunder, but to a pattern of behavior: Trump’s confusion of allies and opponents; his willingness to abandon friends, such as the Kurds; and his trashing of alliances, such as NATO. Mattis’s friends explained in television interviews that what most troubled the retired four-star Marine general and defense intellectual was not just that he could no longer affect policy, but also that his remaining in the cabinet was taken as an affirmation of Trump, a position he could no longer bear.

Even that doughty loyalist, Senate Majority Leader Mitch McConnell, issued a statement on Thursday afternoon that he was “distressed” by the departure of Mattis (a significant sign, many believe, of McConnell’s private worry about Trump’s effect on the Republican Party.) Members of Congress expressed outright fear of a Trump presidency without any guardrails.

The list of departures from Trump’s administration is unprecedentedly long. Though some were forced out for blatant corruption (and shouldn’t have been hired in the first place), others have been fired because Trump has turned against them, and some left because of the president’s abusive treatment. He screams at subordinates at will and scapegoats them with abandon. At first, Trump treated Mattis with respect and even some affection; but he gradually tired of his most distinguished cabinet member’s almost across-the-board disagreement with his policies.

So fickle are Trump’s loyalties that he reportedly “soured” on his third chief of staff before his pick had even started in the position. To fill the job, which no one else seemed to want, Trump had turned to Mick Mulvaney, a conservative former congressman who had already held two high government positions simultaneously. Mulvaney, it turned out, had said in a televised debate during the 2016 election that he would vote for Trump over Hillary Clinton, even though Trump is “a terrible human being.”

Then, at midnight on Friday, a large part of the federal government shut down because Trump had been seeking a fight over the refusal of the Congress (albeit Republican-controlled) to spend billions of dollars to fund his campaign promise to build a wall across the long US-Mexico border. (Trump’s midterm election stunt of ordering troops to the border, purportedly to fend off approaching immigrants from Central America, had deeply rankled Mattis.)

The wall is very unpopular among the public, and only Trump’s most devoted followers view it as the answer to illegal immigration (or drug smuggling). But by using it to cultivate his political base – at most around 35% of the electorate – Trump could corner himself. In a televised White House meeting, he fell into a trap set by Democratic leaders by angrily insisting he would be “proud” to own a government  shutdown if he couldn’t get billions to fund at least part of the wall. Under strong pressure from right-wing media figures to keep his promise, Trump made and abandoned budget deals until time ran out.

So, just before Christmas, hundreds of thousands of federal workers – real people all over the country with bills to pay – were either furloughed or forced to work without knowing when they would be paid. And Trump is now a hostage in the White House, because even he understands that it would be terrible “optics” to be seen playing golf and hobnobbing with his rich friends at his Palm Beach estate while, just before Christmas, government workers were idled.

But while Trump must figure out how to climb down from his fanciful wall, so far he has ratcheted up his pettiness, removing Mattis two months ahead of schedule and tweeting insults to politicians who have criticized his recent blunders. His mood is reportedly fouler than ever, and the holiday season has become suffused with an increased sense of danger emanating from the White House.

Elizabeth Drew is a Washington-based journalist and the author, most recently, of Washington Journal: Reporting Watergate and Richard Nixon’s Downfall.

Trump’s uncanny political instincts and his ruthless “amorality”—A Formidable Challenge


October 28, 2018

Trump’s uncanny political instincts and his ruthless “amorality”—A Formidable  Challenge to Blue Democrats.

by Dr. Fareed Zakaria

ttps://fareedzakaria.com/columns/2018/10/25/trump-owns-the-bloody-crossroads-of-american-politics

Image result for Trump Vs Blue Democrats

“Democrats create mobs, Republicans create jobs” has become a rallying cry for Republicans ahead of the midterms

For those who believe that President Trump is a clownish know-nothing who somehow tapped into the mood of the electorate, or just got lucky in 2016, the last month has been instructive. Trump has demonstrated uncanny political instincts.  When combined with his ruthless “amorality” — a term used by one of his own senior officials in an anonymous New York Times op-ed — he presents a formidable challenge to his opponents.

Trump faces a familiar landscape. The party that holds the White House traditionally has low turnout and does badly in the midterm elections. But rather than accept this as inevitable, Trump has been aggressively trying to beat the odds. He’s turned what are usually disparate races in the House and Senate into a single national election, fought on an agenda that he has defined.

Item one on his agenda is immigration. The reason is obvious: The issue rouses his voters like no other. Trump campaigns relentlessly on it, making the false accusation that if the Democrats win, they will open up the borders and let everyone in.

PHOTO: President Donald Trump along with Republican Senator from Wyoming John Barrasso (L) and Republican Senate Majority Leader from Kentucky Mitch McConnell (R), walk to a Republican Senate luncheon in the U.S. Capitol on Nov. 28 2017.

He has used the current caravan of Central American migrants to highlight his case against the Democrats. Since Republicans are also still highly motivated by fears of terrorism, Trump threw in the accusation that there are “Middle Easterners” in the caravan. (First, there is no evidence for that claim, which Trump himself even admits; and second, if there were, it is an ugly slur to imply that any Middle Easterner is a terrorist.) As the media eagerly fact-checks his rhetoric, Trump seems well aware that they are incidentally repeating his claims and reinforcing the suspicion and fear in the public’s mind.

The second way Trump has turned the midterms into a national vote is by raising the specter of impeachment. Nothing would anger his base more than the notion of an elitist conspiracy (of lawyers, journalists and judges) determined to undo the results of the 2016 election. White House press secretary Sarah Sanders declared that impeachment is “the only message [the Democrats] seem to have going into the midterms.”

Trump’s midterm strategy was foreshadowed by Stephen K. Bannon several months ago, when he explained, in an interview with me on CNN, that the Republicans needed to turn the midterms into a referendum on Trump. “Trump’s second presidential race will be on Nov. 6 of this year,” Bannon said. “He’s on the ballot, and we’re going to have an up-or-down vote.”

How does one counter this campaign? Many Democrats angrily maintain that they do not, in fact, favor open borders and impeachment — that their positions are more nuanced. But when you are explaining nuance in politics, you are losing. The Democratic Party has not found a way to go on the offensive and get Trump to explain that he has, in fact, a more complicated position on any given topic.

But there is a substantive problem in addition to one of style and tactics. The Democratic Party is insisting that recent election results are an unmistakable sign that it needs to change course and become far more populist on economics. But the data clearly show that the American public is very comfortable with where the party is on issues such as health care and inequality.

The challenge for the Democrats is a set of cultural issues — chiefly immigration, but also things such as transgender bathroom laws and respecting the flag — on which a key group of Americans thinks the Democrats are out of touch. An excellent study by the Democracy Fund found that people who had previously supported Barack Obama and then voted for Trump in 2016 (a crucial segment that Democrats could win back) agreed with the Democrats on almost all economic issues but disagreed with the party on immigration and other cultural matters.

Put simply, the study makes clear that the challenge for the Democratic Party politically is not whether it can move left economically but whether it can move right on culture. I say this as someone who agrees with the Democrats on almost every one of these cultural issues. But a large national party must demonstrate that it can accommodate some people who disagree with it on some issues. Doing this without abandoning one’s core principles is a challenge, but it is a challenge Democrats will have to embrace if they seek a durable governing majority.

Eventually, the electorate will be more young and diverse, but in the meantime, the Republican Party is utterly dominant in American politics because it owns the bloody crossroads where culture and politics meet.

 (c) 2018, Washington Post Writers Group

Safeguarding A Rules-based Trading System against America First Trade Economics


October 16, 2018

Safeguarding A Rules-based Trading System against America First Trade Economics

by Dr. Mari Pangestu, Universitas Indonesia

http://www.eastasiaforum.org

 

Image result for Dr. Mari Pangestu

“Without concerted effort and a coalition of willing leadership, including from the EU and East Asia, the future of the rules-based trading system will remain under threat.”–Dr. Mari Elka Pangestu

Despite expectations that the US Federal Reserve would raise interest rates, capital flows to the United States have led to the appreciation of the US dollar against most major currencies.

The hardest hit countries are Argentina and Turkey, which are experiencing fiscal issues complicated by their political situations. Brazil, South Africa and the emerging countries in Asia have also been affected — albeit at a lower rate of depreciation of their currencies in the 10 to 12 per cent range. Even Australia and China have experienced depreciation of around 8 per cent and 5 per cent respectively.

The level of depreciation experienced by different economies reflects how investors perceive their different fundamental macroeconomic conditions, especially the level of their current account and fiscal deficits and policy outlooks.

Image result for Dr IMF's Christine Lagarde

The rising US dollar raises questions about the capacity of emerging economies to service their dollar-denominated debts and the vulnerabilities this could expose in their financial systems. Even if the current economic conditions point to a low potential for contagion from Argentina and Turkey, IMF Managing Director Christine Lagarde recently warned that ‘these things could change rapidly’. The uncertainty that already exists is a clear and present danger.

The uncertainty in the world economy has been increasing since Brexit and the election of President Trump in 2016, and in 2017 as the United States left the Trans-Pacific Partnership and announced many threats to impose trade restrictions. This uncertainty has heightened since January 2018 when US President Donald Trump made good on his threats to remedy bilateral trade deficits — what he sees as ‘unfair trade’ practices against the United States — by imposing tariffs on imported solar panels and washing machines, followed by aluminium and steel.

Since March, the greatest uncertainty has been from the brewing tit for tat trade conflict between the United States and China, which started with the imposition of 25 per cent tariffs on US$50 billion worth of China’s exports to the United States. China retaliated with the same sized tariffs on the same amount of trade from the United States. Trump then escalated the trade war further in September with the announcement of 10 per cent tariffs on US$200 billion worth of China’s exports to the United States.

The US–China trade conflict and the uncertainty surrounding it is expected to have knock on effects on global trade and investment flows. The impact of the reduction in China’s exports to the United States on China’s growth will reduce China’s imports, which in turn will impact the many countries that China has become a major trading partner for.

This means that China and other countries facing US trade restrictions will look for new markets for their goods. The situation has already led some countries to impose restrictions or initiate trade remedy investigations, for instance on steel. This uncertainty has and will continue to influence trade and investment, as businesses evaluate how the increased restrictions will affect their supply chains.

It is too early to tell how large the disruption will be, as it is not easy to dismantle supply chains. But the costs down the line could be great as businesses re-evaluate their trade and investment decisions to insulate themselves from tariffs rather than to maximise their competitiveness.

The most concerning aspect of all this is that, after 75 years of being its greatest advocate, the United States is now the biggest threat to the future of the rules-based trading system that has provided predictability and fairness in the way the world engages in trade. There is no clear light at the end of the tunnel.

The key question is: what is Trump’s intention? Is it to change the rules of the game to benefit the United States and address China’s ‘non-market-oriented policies’ or is it just anti-trade and America First? Assuming it is the former, there are at least three important responses needed.

First is safeguarding the stability of the World Trade Organization (WTO) as the overarching framework to provide predictability, fairness and stability. To this end, it is vital that the WTO dispute settlement mechanism continues to operate. The test case is the Chinese and EU case against US steel and aluminium tariffs and getting past the blocking of panel judge nominations by the United States.

Ensuring that the United States does not use blunt unilateral instruments to address its concerns also means that reforms to the WTO rule book are needed. More must be done to address concerns around intellectual property rights, investment, the environment, labour, competition policy, subsidies, tax, digital data and the treatment of developing countries.

Second, the process of opening-up must continue, with or without the United States. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership is a good start. And it is of the utmost importance that the Regional Comprehensive Economic Partnership negotiations are concluded in November this year. These are all important processes to signal the continued commitment of East Asia to expanding markets and fostering flows of trade and investment.

Third, and what most will agree is the most important process, is unilateral reforms. Given increased global uncertainty and limited policy space for fiscal stimulus, structural reforms are a must for East Asian countries, especially China. These range from trade and investment reforms, as well as reforms related to competition policy, intellectual property, the role of state-owned enterprises and sustainability. As in the past, unilateral reforms are more successfully undertaken when there is peer pressure and benchmarking from international commitments.

Without concerted effort and a coalition of willing leadership, including from the EU and East Asia, the future of the rules-based trading system will remain under threat.

Dr. Mari Pangestu is former Indonesian trade minister and Professor at the University of Indonesia.

This article appeared in the most recent edition of East Asia Forum Quarterly, ‘Asian crisis, ready or not’.

Will Trump’s Trade War Make America Great Again?


July  19, 2018

Will Trump’s Trade War Make America Great Again?

Image result for jomo  and anis chowdhury

The United States has had the world’s largest trade deficit for almost half a century. In 2017, the US trade deficit in goods and services was $566 billion; without services, the merchandise account deficit was $810 billion.

The largest US trade deficit is with China, amounting to $375 billion, rising dramatically from an average of $34 billion in the 1990s. In 2017, its trade deficit with Japan was $69 billion, and with Germany, $65 billion. The US also has trade deficits with both its NAFTA partners, including $71 billion with Mexico.

Image result for jomo kwame sundaram

Economist Professor Dr. Kwame Jomo Sundram

President Trump wants to reduce these deficits with protectionist measures. In March 2018, he imposed a 25% tariff on steel imports and a 10% tariff on aluminium, a month after imposing tariffs and quotas on imported solar panels and washing machines. On 10 July, the US listed Chinese imports worth $200 billion annually that will face 10% tariffs, probably from September, following 25% tariffs on $34 billion of such imports from 7 July.

Do US trade deficits reflect weakness?

The usual explanation for bilateral trade deficits is price differentials. However, the US accuses such countries of ‘unfair’ trade practices, such as currency manipulation, wage suppression and government subsidies to boost exports, besides blocking US imports.

Trump views most trade deals such as NAFTA as unfair. His team insists that renegotiating trade deals, ‘buying American’, a strong dollar and confronting China will shrink US trade deficits.

But the country’s overall trade deficit, offset by capital inflows, is related to the gap between its savings and investments. The US spends more than it produces, thus importing foreign goods and services. Cheap credit fuels debt-financed consumption, increasing the trade deficit.

Total US household debt rose to $13.2 trillion in the first quarter of 2018, the 15th consecutive quarter of growth in the mortgage, student, auto and credit card loan categories. American consumer debt was more than double GDP in 2017.

US government budget deficits have also been growing. From 67.7% of GDP in 2008, US government debt rose to 105.4% in 2017. The federal budget deficit was $665 billion in FY2017, rising 14% from $585 billion in FY2016.

The US budget deficit was 3.5% of GDP in 2017. According to the US Congressional Budget Office, it will surpass $1 trillion by 2020, two years sooner than previously projected, due to Trump tax cuts and spending increases.

Image result for anis chowdhury Anis
Dr. Anis Chowdhury, Adjunct Professor of Economics  at Western Sydney University (Australia)

The growing US economy may also increase the trade deficit, as consumers spend more on imported goods and services. The stronger dollar has made foreign products cheaper for American consumers while making US exports more expensive for foreigners.

These underlying economic forces have become more important than policies in raising the overall trade deficit, while bilateral deficits reflect specific commercial relations with particular countries. Thus, disrupting bilateral trade relations may only shift the trade deficit to others.

Have the cake and eat it?

So, why does the US have a structural trade deficit? As the de facto international ‘reserve currency’ after the Second World War, the US has provided the rest of the world with liquidity. Its perceived military strength means it is also seen as a safe place to keep financial assets. Of about $10 trillion in global reserves in 2016, for example, around three fifths (60 per cent) were held in US dollars.

US supply of international liquidity by issuing the global reserve currency offers several economic advantages. It also earns seigniorage from issuing the main currency used around the world, due to the difference between the face value of a currency note and the cost of issuing it.

With growing foreign demand for dollars, the US can run deficits almost indefinitely by creating more debt or selling assets. Demand for dollar-denominated assets, for example, US Treasury bonds, raises their prices, lowering interest rates, to finance both consumption and investment.

While foreign investors buy low-yielding, short-term US assets, Americans can invest abroad in higher-yielding, long-term assets. The US usually reaps higher returns on such investments than it pays for debt, labelled America’s ‘exorbitant privilege’.

Image result for trump making america great again

” As the US retreats from the global diplomatic stage, use of other reserve currencies, including China’s renminbi, has been growing, especially in Europe and Africa. Thus, ironically, as Trump wages trade wars on both foes and friends, China will probably gain, both geo-politically and economically.

The resulting global economic shift will not only hurt the US dollar and economy through the exchange rate and borrowing costs, but also its geopolitical dominance”.–Jomo and Anis

Thus, for the US to enjoy the ‘exorbitant privilege’ of the dollar’s role as the major reserve currency, it must run a chronic trade deficit. Therefore, giving up the dollar’s global reserve currency status will have major implications for the US economy, finances and living standards.

Can the US win Trump’s trade war?

Barry Eichengreen noted that countries in military alliances with reserve-currency issuing countries hold about 30% more of the partner’s currency in their foreign-exchange reserves than countries not in such alliances. Instead, Trump has prioritized reducing trade deficits to strengthen the US dollar and dominance while disrupting some old political alliances.

As the US retreats from the global diplomatic stage, use of other reserve currencies, including China’s renminbi, has been growing, especially in Europe and Africa. Thus, ironically, as Trump wages trade wars on both foes and friends, China will probably gain, both geo-politically and economically.

The resulting global economic shift will not only hurt the US dollar and economy through the exchange rate and borrowing costs, but also its geopolitical dominance.


Anis Chowdhury
, Adjunct Professor at Western Sydney University (Australia), held senior United Nations positions in New York and Bangkok.

Jomo Kwame Sundaram, a former economics professor, was United Nations Assistant Secretary-General for Economic Development. In 2007, he was awarded received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought. He was recently appointed a member of Prime Minister Dr. Mahathir Mohamad’s Eminent Persons Council on Strategy and Policy.